About the speaker: -
Mr. K. Raghunath has experience of more than 43years which includes his work in multiple industries. He possesses over 31 years of experience in GICRe. He was a vice president at Bharti AXA General Insurance for 2 years and reinsurance director in Mahindra Insurance Brokers for over 7 years. He is currently working as an Advisor to Edelweiss Gallagher Insurance Brokers and he also conducts Training Programs in National Insurance Academy & College of Insurance.
What is Reinsurance? -
- Reinsurance is also known as insurance company insurance or non-life insurance. Reinsurance is a practice in which an insurer transfers part of its portfolio of risks to another party through some arrangement, reducing the likelihood of paying large debts from claims.
- The party that diversifies the insurance portfolio is called the cedant. The party that undertakes some of the potential obligations for some of the premiums is called a reinsurance company.
- This is a process by which an entity (reinsurer) bears all or part of the risks covered by an insurance policy issued by an insurance company in return for the payment of premiums. In other words, it is a form of insurance-by-insurance company.
- When multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in the event of a disaster, this is referred to as reinsurance. The Reinsurance Association of America describes it as "insurance for insurance companies," with the idea being that no insurance company has too much exposure to a particularly large event or disaster.
The Beginnings of Reinsurance
- According to the Reinsurance Association of America, reinsurance dates back to the 14th century, when it was used for marine and fire insurance.
- It has since expanded to cover every aspect of the modern insurance market. There are companies in the United States that specialize in selling reinsurance, reinsurance departments in U.S. primary insurance companies, and reinsurers outside the United States that are not licensed in the United States.
- A ceding can buy reinsurance directly from a reinsurer or from a broker or reinsurance intermediary.
How does reinsurance work?
- Reinsurance allows insurers to stay in business by recovering some or all of the money paid out to claimants.
- Reinsurance lowers the net liability on individual risks and provides catastrophe protection against large or multiple losses.
- The practice also allows ceding companies, or those seeking reinsurance, to expand their underwriting capabilities in terms of the number and size of risks.
- By spreading risk, an individual insurance company can accept clients whose coverage would be too onerous for the single insurance company to handle on its own. When reinsurance occurs, the insured's premium is usually shared by all of the insurance companies involved.
- If a single company assumes the risk on its own, the cost could bankrupt or financially ruin the insurance company, and the loss may not be covered by the original company that paid the insurance premium.
Basic methods: -
There are two basic methods of reinsurance: -
- Facultative Reinsurance –
- Facultative Reinsurance, which is negotiated separately for each reinsured insurance policy.
- Individual risks not covered, or insufficiently covered, by ceding companies' reinsurance treaties, amounts in excess of the monetary limits of their reinsurance treaties, and unusual risks are typically covered by facultative reinsurance. Because each risk is individually underwritten and administered, underwriting expenses, particularly personnel costs, are higher for such business.
- The underwriter of the reinsurer, on the other hand, can price the contract more accurately to reflect the risks involved because they can separately evaluate each risk reinsured.
- Finally, the reinsurance company issues a facultative certificate to the ceding company reinsuring that single policy.
Treaty Insurance –
- Treaty Reinsurance occurs when the ceding company and the reinsurer negotiate and execute a reinsurance contract in which the reinsurer covers a specified share of all insurance policies issued by the ceding company that falls under the scope of the contract.
- The reinsurance contract may require the reinsurer to accept reinsurance on all contracts within the scope (known as "obligatory" reinsurance), or it may allow the insurer to select which risks to cede, with the reinsurer obligated to accept such risk.
Benefits of Reinsurance: -
- Reinsurance gives the insurer more security for its equity and solvency by increasing its ability to withstand the financial burden when unusual and major events occur by covering it against accumulated individual commitments.
- Through reinsurance, insurers can underwrite policies that cover a greater quantity or volume of risk without increasing administrative costs excessively to cover their solvency margins. Furthermore, reinsurance provides insurers with substantial liquid assets in the event of exceptional losses.
Deconstructing reinsurance: -
- All claims established during the effective period are covered under risk-attaching reinsurance, regardless of whether the losses occurred outside of the coverage period. Even if the losses occurred while the contract was in effect, no coverage is provided for claims that arose outside of the coverage period.